The Office of Medicaid Ignores that Trustees Have Fiduciary Duties to the Remainderpersons, and Cannot Use Powers to Skew Beneficial Interests

May 18, 2014

In the misleading, unfair and unbalanced memorandum entered into the fair hearing record at MassHealth trust denial cases, the Office of Medicaid usually takes a legally invalid view of Massachusetts trusts, and ignores the fiduciary duties of the trustee.

As a fiduciary, a trustee has the dual duties of loyalty and impartiality. See Johnson v. Witkowski, 30 Mass. App. Ct. 697, 705 (1997), and more generally, Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501, at 528-529 (1997) quoting Judge Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 4630464 (1928) “(n)ot honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” The duty of loyalty to the beneficiaries requires of the trustee that he or she act solely in accordance with the terms of the trust instrument construed so as to carry out the intent of the Settlor. Watson v. Baker, 444 Mass. 487, 491 (2005). Therefore, a trustee may not commit any act that would harm the interest of any beneficiary of the trust, that would waste any trust property, that would give trust property to anyone not entitled thereto, or that would otherwise be contrary to the intent of the Settlor in entrusting the Settlor’s property to the management of a trustee. See King v. Nazzaro, 78 Mass. App. Ct. 1128 (2011); Murphy v. Murphy, Docket No. 2004-3937-BLS2 (2006.) Therefore, if the trust provides that no distribution of principal shall be made to the Settlor, then the trustee is forbidden to do so. To do otherwise would do harm to the beneficial interests of the beneficiaries (or the other beneficiaries, if, for example, the Settlor is an income beneficiary of the trust), and it would be a breach of fiduciary duty. See Anderson v. Bean, 272 Mass. 432, 447-448 (1930).

The Office of Medicaid attempts to argue that the purpose of a trust may not be used as a limitation on trustee discretion to make a distribution of principal to the Settlor, but ignores that it is the responsibility of the trustee to understand all provisions of the trust instrument and construe them so as to give meaning and efficacy to all of them. As the Court stated in Dana v. Gring, 374 Mass. 109, 116 (1977), it is a fundamental principle of Massachusetts law “to ascertain the intention of the testator from the whole instrument, attributing due weight to all its language . . . and to give effect to that intent unless some positive rule of law forbids.”

Another duty of a trustee, the duty of impartiality as between and among the beneficiaries, requires that the trustee not favor one beneficiary over another; instead, the trustee is bound to treat all beneficiaries equitably in accordance with the terms of the trust construed as a whole. King v. Nazzaro, 78 Mass. App. Ct. 1128 (2011). Thus, a power that allows a trustee to make a particular type of investment is not authority to override the intentions of the trust. “Even when there are broad discretionary powers, a trustee may not exercise his or her discretion so as to shift beneficial interests in the trust.” Fine v. Cohen, 35 Mass.App.Ct. 610, 617 (1993). The trustee must balance risk and return in the trustee’s management of the trust estate so as to be fair to both the life income beneficiaries and the remainderpersons.

Trustee duties of loyalty and impartiality are at the very core and essence of what a trust is. A trust is a relationship wherein a trustee manages property for the benefit of others. The trustee is given powers to carry out his assigned duties in the context of the beneficial interests that are bestowed upon the income beneficiary or life tenant and remainderpersons of the trust. For every interest that a beneficiary has under a trust instrument, the trustee has a correlative duty to safeguard and provide that interest to the beneficiary. Thus, trustee powers are made available to the trustee only to the extent necessary to provide the trust beneficiaries with their rightful beneficial interests under the trust. If a beneficial interest is denied to a beneficiary, then the trustee has no authority or discretion to make it available to the beneficiary. The power to purchase annuities, life insurance or any other investment is granted to the trustee only to the extent that the exercise of that power will secure to the beneficiaries their respective beneficial interests. Such a power may not be used to divert one beneficiary’s interest to another beneficiary without breach of fiduciary duty. The conversion of principal to income, or vice versa, to redirect trust resources from one beneficiary to another is not allowed due to the trustee’s duty of impartiality.

MassHealth regulations do not require that the fiduciary duties of a trust be ignored; rather, the fiduciary duties of a trustee are specifically recognized in the definition of “trust” at 130 CMR §515.001: “a legal device satisfying the requirements of state law that places the legal control of property or funds with a trustee. It also includes, but is not limited to, any legal instrument, device, or arrangement that is similar to a trust, including transfers of property by a grantor to an individual or a legal entity with fiduciary obligations so that the property is held, managed, or administered for the benefit of the grantor or others. Such arrangements include, but are not limited to, escrow accounts, pension funds, and similar devices as managed by an individual or entity with fiduciary obligations.” (emphasis added).